Bank of Israel Holds Rate, but Cuts Growth Forecast

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Bank of Israel Governor Karnit Flug.Credit: Emil Salman

The Bank of Israel trimmed its 2014 growth estimate Monday, for the fourth straight time, following a weaker than expected start to the year.

All the same, the central bank left its benchmark interest rate unchanged, at 0.75%.

The bank said gross domestic product, including the effect of gas production at the Tamar field, would grow 2.9% this year, down from a previous projection of 3.1%, based on lower global growth forecasts. It said growth would not be much better in 2015, when it predicts a rate of 3% – higher than its previous forecast.

“There are signs of moderation in the growth of private consumption, and the virtual standstill in goods exports continues against the background of moderation in world trade,” the bank said.

The benchmark rate has been at 0.75% since February, a sign the economy was not weakening enough to warrant further stimulus, despite very low inflation. But economists were divided on whether the central bank may yet cut the rate, and which factors would prompt it to do so, amid mixed economic signals.

Israel’s unemployment rate rose to 5.9% last month, from 5.7% in April, the Central Bureau of Statistics reported Monday. But the central bank said its S index, a barometer of economic activity, rose 0.2% in May, after stagnating the previous two months.

Last week, the statistics bureau revised first-quarter GDP growth sharply upward, to 2.7% from a preliminary 2.1%. Ten of 13 economists polled by Reuters had forecast no move.

But Ori Greenfield, chief economist at the investment house Psagot, said he expected Bank of Israel Governor Karnit Flug to lower rates some time in the next several months. He pointed to the bank’s prediction that inflation would drop in the next few months, which will compel it to lower rates.

The bank has to take into consideration rising home prices and the strengthening shekel, said Oren Eldad, CEO of A Trade.

“It’s saving a rate cut for some time in the next few months, when inflation is expected to fall,” he said. “Lowering the rate will increase mortgage demand and cause another rise in home prices. On the other hand, the Bank of Israel needs to keep the exchange rate steady and avoid depreciation.”

But Nira Shamir, chief economist at Israel Discount Bank, said she expected Flug to hold the interest rate steady the rest of the year and begin raising it in the first half of 2015. She cited rising asset prices, particularly for homes, as well as low corporate bond rates.

Bank of Israel economists forecast the key interest rate would end this year at 0.75%, and double to 1.5% by the end of 2015. However, they are independent of the central bank’s Monetary Policy Committee, which makes rate decisions.

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